Be cautious with the employee who “doth protest too much.” The law protects whistleblowers. Employers must be careful to avoid retaliating against employees who report good faith concerns, even when such concerns prove meritless. But this does not leave employees free to blackmail employers by threatening to makes claims unless the employer capitulates to settlement demands. In Stenehjem v. Sareen, a California Court of Appeal allowed an employer to pursue a counter-claim for extortion where its employee allegedly sent an email threatening to report it to the U.S. Attorney and file a federal False Claims Act action unless it settled the employee’s defamation lawsuit. The Court also rejected the employee’s claim that his threat constituted protected speech under California’s anti-SLAPP statute. While Stenehjem presents a welcome development for California employers, its core allegations do not arise often. Employers should thus review situations closely with counsel before leaping to the conclusion that an employee’s “threat” to report concerns amounts to extortion.
An employee’s e-mail threatening to report his employer to the U.S. Attorney and file an action under the federal False Claims Act unless the employer agreed to settle his defamation claim constituted extortion, as a matter of law, the California Court of Appeal has ruled. Stenehjem v. Sareen, No. H038342 (Cal. Ct. App. Jun. 13, 2014). Thus, the e-mail was not protected speech under California’s anti-SLAPP statute, Cal. Code Civ. Proc. § 425.16. The Court reversed the dismissal of the employer’s complaint for extortion. While the unusual allegations in this case do not arise often, the decision is a positive development for California employers.
Jerome Stenehjem was terminated in January 2011 from employment with Akon, Inc. Thereafter, he sued Akon and Surya Sareen, Akon’s president and chief executive officer, for defamation and wrongful termination, among other things. Shortly after Stenehjem’s termination, his attorney, Rutger Heymann, spoke with Akon’s counsel, John McDonnell, and made a “pre-litigation” settlement demand of $675,000. McDonnell rejected the demand, describing Stenehjem’s case as “meritless.” Three months later, Heymann wrote to McDonnell requesting that the parties mediate Stenehjem’s claims. McDonnell rejected this request.
In August 2011, Stenehjem, now representing himself, sent an e-mail to McDonnell requesting a meeting to resolve his claims and threatening to report Sareen to the U.S. Attorney, Department of Justice and Department of Defense for allegedly directing Stenehjem to create false accounting reports. Stenehjem also threatened to file a qui tam action under the federal False Claims Act claim against Sareen to obtain “the biggest payout they can get with the least effort and expense.”
Stenehjem later sued Akon and Sareen, and Sareen filed a cross-complaint for extortion against Stenehjem. Stenehjem filed a motion to strike under the California anti-SLAPP statute, and the trial court granted the motion, finding Stenehjem’s communications were protected pre-litigation settlement negotiations. Sareen appealed.
“SLAPP” is an acronym for “strategic lawsuit against public participation.” Under California law, a SLAPP suit can be brought against a plaintiff whose claim “seeks to chill or punish a party’s exercise of constitutional rights to free speech and to petition the government for redress of grievances.” The anti-SLAPP statute allows courts to decide SLAPP suits using a special motion to strike, similar to a summary judgment motion. If the “assertedly protected speech or petitioning activity [is] illegal as a matter of law,” a defendant cannot use the anti-SLAPP statute to strike the plaintiff’s complaint. Extortion is not “protected speech” or “petitioning activity.” The California Supreme Court ruled in Flatley v. Mauro, 39 Cal. 4th 299 (Cal. 2006), that a settlement demand letter that threatened to accuse the defendant of rape and other legal violations was not a protected pre-litigation settlement negotiation; rather, it was extortion as a matter of law.
Stenehjem argued he did not engage in extortion by sending the August 2011 e-mail because the e-mail did not directly threaten Sareen and did not explicitly demand money. Stenehjem asserted the e-mail discussed litigation procedure and requested only a meeting with Sareen to resolve his claims. The appellate court rejected Stenehjem’s arguments, finding that e-mail constituted “extortion as a matter of law.”
Based on the parties’ history of settlement discussions, the Court found meritless Stenehjem’s assertion that his e-mail reflected “merely a benign desire” to discuss his claims. The Court noted the e-mail accused Sareen of ordering Stenehjem to create false accounting documents, and then threatened to expose Sareen to federal authorities for alleged violations of the False Claims Act unless he negotiated a settlement of Stenehjem’s claims. It was of “no consequence” that the e-mail did not identify the crime, conditioned his silence on receiving a settlement payment, or included an exact monetary demand, the Court said. “The absence of either an express threat or a demand for a specific sum of money in the e-mail does not negate its fundamental nature as an extortionate writing,” the Court explained. Accordingly, the Court reversed the dismissal of Sareen’s cross-complaint for extortion.
This case cautions that even a “veiled” threat to report criminal activity or file an unrelated claim unless settlement demands are met is risky. Employees that do so could be faced with potential liability for extortion.